The Roth IRA is one of the best financial tools available to regular people — and it’s one of the most underused. A lot of people vaguely know it exists but aren’t sure how it works, whether they qualify, or how to actually open one.
This guide answers all of that.
What Is a Roth IRA?
A Roth IRA is a type of individual retirement account where you contribute money you’ve already paid taxes on — and then the money grows tax-free. When you retire and withdraw it, you pay no taxes on any of it, including decades of investment gains.
That last part is the big deal.
Compare it to a traditional IRA or 401(k), where you get a tax deduction now but pay taxes on withdrawals later. With a Roth, you skip the deduction now but never pay taxes again on that money — not on the growth, not on the withdrawal.
For most people in their 20s, 30s, or even 40s, that trade-off is a great one.
Who Can Contribute?
There are two key rules:
1. You need earned income. This means wages, salary, self-employment income, or tips. Investment income doesn’t count. If your only income is from dividends or rentals, you can’t contribute.
2. Your income can’t be too high. The IRS phases out Roth IRA eligibility above certain income levels. For 2025:
- Single filers: phase-out begins at $150,000, eliminated at $165,000
- Married filing jointly: phase-out begins at $236,000, eliminated at $246,000
If you’re above the limit, look into the “backdoor Roth IRA” — a legal workaround that high earners use. It involves contributing to a traditional IRA and then converting it.
How Much Can You Contribute?
For 2025, the limit is $7,000 per year (or $8,000 if you’re 50 or older). You can contribute up to your earned income if it’s less than the limit — so if you made $4,000 last year from a part-time job, you can contribute up to $4,000.
You have until Tax Day (typically April 15) of the following year to make contributions for the prior year. That means you can contribute to your 2025 Roth IRA as late as April 15, 2026.
Why the Tax-Free Growth Is Such a Big Deal
Let’s put some numbers to it.
Say you’re 28 years old and contribute $6,000/year to a Roth IRA for 35 years until you’re 63. Assuming 7% average annual returns (roughly what a broad stock market index has historically returned after inflation):
- Total contributed: $210,000
- Account value at 63: ~$830,000
- Tax owed on withdrawal: $0
In a taxable account, that growth would be subject to capital gains taxes. In a traditional IRA, withdrawals would be taxed as ordinary income. In a Roth, none of it gets taxed. The government already got their cut when you paid income tax on the money before contributing.
What Can You Invest In?
A Roth IRA is an account, not an investment. Once you open one, you can invest the money in basically anything available through the brokerage: stocks, bonds, index funds, ETFs, mutual funds.
Most people do best keeping it simple: a low-cost total stock market index fund or a target-date fund based on your expected retirement year. You don’t need to pick individual stocks. You don’t need to rebalance constantly. A simple index fund approach in a Roth IRA is one of the most reliable wealth-building strategies that exists.
The Flexibility Advantage (That Most People Don’t Know About)
Here’s something most people don’t realize: you can withdraw your contributions (not gains) from a Roth IRA anytime, for any reason, without penalty or taxes.
If you contribute $10,000 over the years and your account grows to $14,000, you can take out up to $10,000 with no penalty. The $4,000 in gains needs to stay until retirement (or you’ll face taxes and penalties on it).
This makes a Roth IRA flexible in a way traditional retirement accounts aren’t. It can double as an emergency backup — though using it that way isn’t ideal, since that money loses its tax-free growth potential.
Roth IRA vs. 401(k): Which Comes First?
If your employer offers a 401(k) with a match, contribute enough to get the full match first — that’s a 50–100% instant return on your money, unbeatable.
After that? Many financial advisors recommend:
- Max out your Roth IRA ($7,000/year)
- Then go back and contribute more to your 401(k) if you still have room in your budget
The logic: Roth IRAs have more flexible investment options than most 401(k)s, and the tax-free withdrawal advantage is valuable.
If your tax rate is low now but expected to be high later (common for younger, lower-income workers), Roth is especially attractive. If you’re at peak earning years and expect a lower tax rate in retirement, traditional may make more sense.
How to Open a Roth IRA
It takes about 15–20 minutes and you can do it entirely online.
Step 1: Pick a brokerage. For most people, Fidelity, Vanguard, or Charles Schwab are excellent choices. No account minimums at Fidelity and Schwab. All three offer access to low-cost index funds.
Step 2: Open the account. Select “Roth IRA” when prompted. You’ll need your Social Security number, a government ID, and your bank account information.
Step 3: Fund it. Transfer money from your bank account. You can start with whatever you have — even $50.
Step 4: Invest the money. This step is critical and often skipped. The money sitting in your Roth IRA as cash earns almost nothing. You need to actually invest it. Buy an index fund — something like FSKAX (Fidelity) or VTSAX (Vanguard) for total US market exposure, or a target-date fund like FIPFX or VTTSX.
Step 5: Set up recurring contributions. Automate a monthly contribution from your bank. Even $50–100/month compounds dramatically over decades.
Common Mistakes
Opening the account but not investing. Cash sitting in an IRA isn’t invested. You have to choose what to buy.
Waiting until you have enough money to start. You don’t need to contribute the full $7,000 at once. Start with what you have.
Overthinking the investments. Pick a total market index fund or target-date fund and move on. Don’t let the paralysis of choice keep you from starting.
Withdrawing early. Taking out gains before 59½ usually triggers taxes and a 10% penalty.
The Bottom Line
If you have earned income and you’re under the income limit, opening a Roth IRA is one of the smartest things you can do with your money. The tax-free growth over decades can add up to six figures — or more — compared to a taxable account.
It takes 20 minutes to open. Start now. Time in the market matters more than timing the market.
Once your Roth IRA is set up, a free tool like Empower can help you see how your retirement accounts fit into your overall financial picture — net worth, asset allocation, and projected retirement income, all in one dashboard. And if you want a dead-simple way to build the investing habit alongside your IRA, Acorns automatically invests your spare change, making it feel effortless.
This article contains affiliate links. If you sign up through our links, we may earn a commission at no extra cost to you.
Related Reads
- Roth IRA vs Traditional IRA: Which Should You Pick? — once you know what a Roth IRA is, here’s how to decide between it and a Traditional IRA
- What Is a 401(k)? — understand how your employer retirement account fits alongside your Roth IRA
- Index Funds for Beginners — once your Roth is open, here’s the simple way to invest inside it